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How Brexit paved the way for Jeremy Hunt to unshackle the City

Hunt - Zara Farrar/HM Treasury
Hunt - Zara Farrar/HM Treasury

Six years on from the Brexit vote, warnings of an exodus of money and jobs from the City have proven to be overblown.

Brexit has not led to a crash for the City. But until Friday’s “Big Bang 2.0”, Britain had also failed to take advantage of the opportunities available to give London a competitive edge.

Jeremy Hunt will hope that his sweeping reforms can now relax and reshape the most onerous rules.

Experts say over a third of the more than 30 reforms outlined in the shake-up have been made possible by the UK’s departure from the EU. Some of the others being removed were imposed in the wake of the financial crisis to prevent excessive risk-taking, but are now deemed unnecessary.

Mr Hunt said that Brexit freedoms have given the UK “more latitude” and allowed it to “do more” than it otherwise would have been able to.

Changes only made possible because of Brexit include tailored rules on short-selling, altering the Mifid rules and replacing the Packaged Retail and Insurance-based Investment Products (PRIIPS) regulations, which forced investment funds to produce documents for their products they complained were onerous and misleading to consumers.

Other post-Brexit changes include removing burdens on commodities derivative trading and introducing a listings shake-up that has been proposed for London’s stock market .

However, Mr Hunt also admitted that many of the most important reforms should have been done even before Brexit.

“There are plenty of things amongst these reforms that we could have done anyway, [and] we should have done,” the Chancellor said.

“This demonstrates us wanting to be constantly ahead of the game.”

Giving the Bank of England’s Prudential Regulation Authority a new goal to make the UK financial sector more competitive globally and reforming bank ring fencing could have been introduced without Brexit.

Can the new rules give the UK a sharper edge?

Chris Woolard, UK financial services regulation leader at EY, said the Government is trying to put together a package that targets the competitiveness of the UK.

“It's a clear attempt to try and make the UK as relevant a possible jurisdiction to do business in the future,” he said.

“There's an element of adjusting post exit, there's an element of adjusting actually some UK reforms that happened after the financial crisis and there’s an element of catching up with where technology is going with digital assets.”


Do the ‘Edinburgh Reforms’ go far enough?

By Simon Foy

Just months before Brexit ejected him from the Treasury, George Osborne gave City bankers one final bashing for their sins.

In March 2016, the then-Chancellor introduced a new law that could put senior City executives behind bars for up to seven years if their risk taking was deemed to be egregious enough.

The Treasury was unambiguous in how it wanted its new “senior managers’ regime” to be perceived, stating bluntly: “Senior bankers to face jail for reckless decisions.”

The move terrified City executives, but Osborne was determined to appear tough. He said: “This Government has learnt the lessons of the past. The new criminal offence… is the latest milestone in my plan to ensure that the British banking industry operates to the highest possible standard.

“It is absolutely right that a senior manager whose actions cause their bank to fail should face jail.”

Now, after years of stagnation, relaxing the senior managers’ regime is one of 30 regulatory reforms unleashed by Jeremy Hunt, the Chancellor, in a bid to awaken the Square Mile from its slumber.

Dubbed the “Edinburgh Reforms” by Hunt – and referred to as “Big Bang 2.0” by his predecessor Kwasi Kwarteng – the deregulatory package also includes a loosening of ring-fencing rules for smaller banks, mandating financial regulators to focus on economic growth and competitiveness and encouraging pension funds to invest in a wider range of assets.

Risk taking in the City is back with a bang, but will it go far enough to free Britain’s financial services industry from its post-crisis decline?

Bidhi Bhoma, chief executive of City investment bank Liberum, says: “There is no doubt that the objective of removing red tape in the City with the aim of making us more competitive post-Brexit is a good thing. However, I don’t believe these measures will herald a Big Bang 2.0 or anything close to that.”

Although Hunt dropped Kwarteng's term, the package will be regarded as a win for the banking industry after years of lobbying for rules introduced in the wake of the financial crisis to be watered down.

David Postings, chief executive of UK Finance, the main banking trade group, said the reforms mark a “major step in ensuring the sector remains strong and internationally competitive”.

The Government will relax ring-fencing rules for smaller banks that require them to separate their retail banking services from investment and international banking activities. It will do so by raising the threshold at which the ring-fencing regime applies to £35bn from £25bn, exempting the likes of Virgin Money and TSB from rules considered unnecessary given their size.

Meanwhile, ministers will launch a review of the senior managers’ regime in early 2023 to relax some elements of the regulation as the Government believes it is too “onerous” in its current form.

Andrew Griffith, the City minister, says: “We don’t want to remove it, but we don’t want to see any unnecessary friction either.”

Other measures include a review of short-selling regulation in a potential boost for hedge funds; a new trading venue to allow small businesses to be able to raise cash from public markets for the first time; axing Brussels red tape around investment research known as Mifid 2; and making it more straightforward for companies to float on the stock exchange by overhauling prospectus rules.

The Government will also launch new long-term asset funds that will invest mainly in illiquid assets such as infrastructure. The announcement also contained further details about how ministers hope to cajole investors into supporting the switch to green energy.

Early next year, the Treasury will seek to address “greenwashing” – where companies purport to be environmentally friendly through deceptive claims – and publish a new green finance strategy.

On Friday, Hunt tried to somewhat downplay the scale of the reforms – perhaps in an acknowledgement that voters will remember the financial crisis that led to all those rules being imposed to begin with.

He said the UK will make sure it does not “unlearn the lessons of 2008”, adding: “It would be wrong to say this is of the same scale as what Nigel Lawson did in 1986” – a reference to Margaret Thatcher’s initial “Big Bang” in the mid-1980s.

Others in the Treasury were more bullish about the package. When asked about the rebranding of the reforms, Griffith - who also served as City minister when Kwarteng was chancellor- said: “This is a fulsome set of reforms that is very ambitious. Don’t worry too much about what it’s called… it will unleash the opportunities of Brexit.”

But some City bosses say the damage done by aspects of European Union-era regulation cannot be reversed.

Bhoma, of Liberum, said: “In terms of direct impact to mid-market banks like us, it is too late to undo the damage to equity research caused by Mifid 2  – that genie is already out of the bottle and can’t be put back.”

While still dominant in Europe, London has struggled to distinguish itself against the world’s other preeminent financial hubs in recent years. Since Brexit, Amsterdam and Paris have taken a chunk of its share trading activity, while the EU has ordered banks to move jobs out of the City and the bloc is also trying to stage a raid on London’s €660 trillion (£563 trillion) clearing market.

Another measure in Hunt’s 30-point plan was to push ahead with recommendations from a government-backed review led by Mark Austin, a partner at City law firm Freshfields, on secondary capital raisings by companies that are already listed.

The review proposed to make it easier for companies to tap investors for cash by scrapping costly prospectuses for most secondary fundraisings.

Austin also recommended that retail investors, who have historically been excluded from many fundraisings, should be involved in all capital raisings.

On Friday, Austin welcomed the wider package of reforms, but said: “This is not a ‘Big Bang’, it is a sensibly thought-through Darwinian evolution.”

He added: “It is not about throwing the regulatory baby out with the bath water, it is about smarter regulation that is right for keeping the UK as relevant as a financial centre in the future as it has been in the past.”

“Big Bang” or not, Hunt has proclaimed the biggest single shake-up of City rules in more than three decades in a marked shift away from the post-crisis consensus where banker bashing became par for the course.

He, and City executives, will be hoping that the Government has done enough to allow the Square Mile to regain its status as a financial centre to be envied.